Green Mountain Analyst Roundup Runs Hot To Cold

By Teresa Rivas

Green Mountain Coffee Roasters (GMCR) was down 3.3% at recent check, following the company’s mixed third-quarter earnings report, delivered last night after the close.

Analysts had begun to digest the report today, and opinion ranged from bulls to bears.

To start with the former, Lazard Capital Markets’ Matthew DiFrisco reiterated a Buy rating and $97 price target on the stock: “ We remain aggressive buyers of GMCR as it contends with the market’s knee jerk reaction reflecting a misleading initial read-through that suggests soft F3Q13 sales and a lowered top-line outlook. With K-Cup packs growing 21% in volume and 18% in dollars, F3Q13′s miss was on account of a contraction of low margin brewers and accessories in Canada. Gross margin dollars grew a record 34% in F3Q13 reflecting the stable volume growth of K-Cups amid lower coffee costs and improved manufacturing efficiency. Importantly, the massive margin expansion is concurrent with the emergence of license partners that carry lower per cup revenue but equivalent profit dollar contribution for GMCR.”

In addition, Imperial Capital’s Mitchell Pinheiro maintained an Outperform rating and $95 price target: “We are maintaining our view that GMCR is capable of increasing earnings at a mid-teen rate (+17%) over the next three years driven by a growing installed base, stable attachment rates and meaningful margin improvement. Importantly, we believe GMCR’s innovation pipeline is robust and could provide significant incremental growth beginning in FY15. We believe the stock represents exceptional value, at 10.8x FY14 EBITDA, a 26% discount to consumer growth companies and on par with mature, low growth, packaged food businesses.”

KeyBanc’s Akshay Jagdale, who earlier this week wrote that he believes a new partnership announcement is on the way for Green Mountain, maintained a Buy rating and a $90 price target. “Given the continued deceleration in sales growth, the aforementioned change in long-term sales guidance will likely be viewed negatively (ammunition for the shorts) given that it supports the theory that the slope of GMCR’s sales growth is pointing to single digits long term. Until sales growth stabilizes and accelerates, which is our and management’s expectation, investors have to put their faith in management’s ability to increase the rate and effectiveness of its innovation. To that end, we view partnership announcements as a leading indicator for the potential success of GMCR’s innovation pipeline.”

By contrast, Janney Montgomery Scott analyst Jonathan Feeney maintained a Neutral rating and $72 price target on the stock: “Favorable green coffee costs and operating efficiencies drove another strong profit beat (+$0.08 at the EBIT line) in 3Q13, but top line missed expectations for the 2nd straight quarter, driven by slower K-cup unit growth (apparently partly due to shipment timing) and another soft brewer result. Pricing (-2% y/y) appears to be holding up better than expected, though we still think it is too early to know to what degree the roll-out of quality, GMCR-produced K-cup offerings at the low end of the pricing spectrum will impact the profit pool. While we note potential excitement leading up to GMCR’s first analyst day (9/10) around the potential for its innovation plans (interactive brewers, cold beverages) and enhanced capacity to add new license partners, with an investment profile more like tech than staples, we think cash still has to be king. While FCF realization is improving, we note that roughly half of this year’s FCF growth has been driven by working capital, and we remain uncertain if/when cash costs will ratchet down.”

Stifel Nicolaus’s Mark Astrachan was also skeptical, maintaining a Sell rating and fair value estimate in the mid-$40s: “Slowing sales growth is most concerning and likely to worsen, in our view, driven by peaking household penetration of K-Cup brewers, increasing competition from unlicensed brands, and worsening price/mix. We also believe non-recurring gross margin benefits, including coffee, which will be a tailwind through F2014, mask weaker fundamentals (i.e., coffee costs were a +370bps y/y benefit to gross margin, lower sales returns +100bps, and a change in estimate for a charge related to a non-coffee purchase commitment +80bps).”

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